With dozens of companies deciding to switch their method of accounting for stock options this year, the Financial Accounting Standards Board (FASB) agreed on August 7, 2002 to consider a significant change in the transition requirements that apply to the year of the switch.

Specifically, the board asked its staff to look into two possible changes:

• A retroactive restatement method that would allow companies to apply the change retroactively to awards granted in prior years going back to 1995.
• Another method that would allow companies to expense any new options issued since the beginning of the fiscal year, as well as the unvested portion of previous awards.

Neither method is allowed under current rules set by Financial Accounting Standard No. 123, Accounting for Stock-based Compensation. FAS123 uses a "clean slate" method. This method allows companies to expense stock-based compensation granted to employees since the start of the year in which the expensing of options is commenced. It prohibits companies from expensing any portion of awards granted in prior years, except to the extent those awards are modified or settled.

According to an Action Alert issued by FASB on August 9, 2002, two tentative decisions have been made: (1) Companies that decide to expense options will be able to choose the FAS123 method or either of the two alternatives described above. (2) Companies that don't choose the retroactive restatement method will be required to disclose pro forma net income and earnings per share as if the FAS123 method of expensing options had been applied to all awards in all periods presented in their financial statements.

More Changes Possible

Ernst & Young (EY) has been warning companies of the potential for more changes. A recent EY alert said, "Reports continue to surface that the chairman of the FASB, Robert Herz, believes that if the International Accounting Standards Board issues a standard requiring all employee stock-based compensation to be recognized at fair value, the FASB will at that time evaluate whether similar accounting should be required under U.S. GAAP."

The Financial Times reported that FASB has said it will put out for comment stricter measures being considered by the International Accounting Standards Board, with a view to producing its own proposal in spring of 2003. ("FASB Lays Out Option Choices," August 7, 2002.)

-Rosemary Schlank